Could the USPS Be the First Major Business Casualty Of The War on Terrorism?

By Alan M. Robinson

October 23, 2001

Direct Communications Group

Terrorists have now struck the United States Postal Service with a second punch while it is still reeling from the effects of acts of September 11. The terrorist acts in New York, Washington DC and Pennsylvania caused revenue to shrink by $300 to 400 million and raised operating costs by $60 million. Now, the distribution of anthrax in letters has raised questions about the safety of the mail and has caused recipients to place holds on their incoming mail. The Arizona Daily Star has gone so far as to stop accepting letters to the editor and other newspaper departments sent as regular mail. The Postal Service also faces substantial costs of closing and cleaning facilities through which the tainted letters passed and ensuring employee safety. This second punch may be sufficient to take a Postal Service that was already on the financial ropes and put it down for the count.

Till now, the economic effects of terrorism have resulted in the closure of few businesses of consequence. The destruction of the World Trade Center closed the sandwich shops and other small businesses at ground zero when their places of business were destroyed or placed off limit to customers. Two small airlines, Midway and National that were already in bankruptcy have shuttered. For firms on the brink of bankruptcy, the intensification of the economic slowdown has made turnaround plans look less promising and liquidation more attractive to creditors

The Postal Service's core financial problem is no different than many businesses writing turnaround plans with a goal of avoiding bankruptcy or liquidation. These problems were all evident before September 11. First, the Postal Service's liabilities far outstrip its assets. Second, the business does not generate sufficient cash to prevent service deterioration. Third, the business generates substantial operating losses. Fourth, the Postal Service's borrowing needs pushes its annual and total debt toward statutory limits.

. The Postal Service faces substantial unfunded liabilities to cover the pension and retirement costs of its employees. The known liability for civil service pensions exceeds $32 billion and does not include liabilities to be added in future years. The liability for retiree healthcare benefits approaches $40 billion. The Postal Service has no hard assets to cover these liabilities. Instead, the Postal Service and accounting conventions allow future postal revenues to be considered as an asset equal to the unfunded liability because rates set in a regulatory process are expected to recover all costs. Future postal volumes and revenues are now substantially less certain than before the terrorist attacks. As such the accounting convention granting the Postal Service a clean balance sheet may no longer hold.

The Postal Service's cash situation is equally precarious. The Postal Service must generate over $4 billion in cash above operating expenses to cover unfunded annuitant liabilities. In fiscal year 2000, nearly 80 percent of all operating cash went to cover these expenses. The limited cash reserves, and large annuitant payments, have caused the Postal Service this year to freeze capital spending through 2003. The only exceptions are cases of emergency or unsafe working conditions. The tainted letters will introduce clean up and security costs that the Postal Service had not anticipated when the freeze was announced. The cash shortage means that the new spending necessary to respond to the attacks will close out capital spending further into the future and may require deeper budgetary cuts than previously planned. In this tight cash environment, projects such as New York's Penn Station redevelopment and new post offices in areas experiencing population growth are impossible for the foreseeable future. Without the cash necessary to expand its network into high population growth areas, the Postal Service effectively retreats from providing retail services to customers in many parts of the country.

The Postal Service could generate the necessary cash if it could generate positive net income. However since Postal reorganization in 1970, the Postal Service's losses have totaled at least $5 billion. Prior to September 11, the losses expected for the current fiscal year were $1.35 billion. This forecast will worsen as the Postal Service incurs increases in security, labor, workers compensation, and environmental costs and decreases in mail volume due to the economic slowdown, delays in mail delivery within corporate mailrooms, and refusal of some recipients to accept certain types of mail.

All of these financial problems are complicated by the Postal Services debt problems and statutory debt limits. The Postal Service has covered its operating losses and some of its capital needs through borrowing. Its long-term debt nearly equals its cumulative losses. The Postal Service's total debt will reach about $11 billion at the beginning of this fiscal year. If the terrorist attacks substantially worsen operations or increase capital spending needs to counter the impact of anthrax, the Postal Service could hit its annual $3 billion statutory borrowing limit and still not have sufficient cash pay its annuitant and other bills that come due a year from now. If the terrorist attacks have systemic impact on the use of mail services, the Postal Service could hit the limits to its total borrowing authority by the end of its 2003 fiscal year.

In addition to making the Postal Services existing financial troubles more difficult, the terrorist attacks have added two new burdens to the Postal Service's load. First, the Postal Service now has to restore the belief of its employees that their work environment is safe and that their employer is doing everything possible to ensure their safety. Second, the Postal Service has to restore the confidence in its brand. Recipients now have to be convinced that it is safe to open their mail. Without that confidence, senders will not send mail that recipients will not open. Restoring brand confidence under these circumstances would be difficult. The challenge is made even more difficult as it must be done while the Postal Service implements substantial rate increases in a sluggish economy.

This double challenge is equivalent to what faced Value Jet and Air Florida after air crashes and neither carrier survived. The American economy can not afford for the Postal Service to suffer the same fate. The "mail" economy is an $871 billion industry and employs nearly nine million workers.

Restoring the confidence of the Postal Service's employees and customers will be an expensive proposition. The Postal Service Board of Governors has authorized expenditure of $1 billion to improve security and safety without identifying the cash source to cover the unexpected costs. This is on top of the nearly $1 billion that the Postal Service asked for in a budget submitted prior to the terrorist attacks. Losses in mail revenue and additional operating costs will likely increase the Postal Service's requests towards a range of $5 to $8 billion.

Once the immediate crisis passes, a long-term strategy is needed to ensure that the Postal Service can continue to provide service in a radically changed environment and that its obligations to employees, annuitants, and bondholders are paid. Proposals developed by the Postal Service, the mailing community, and Congress all need to be rethought in light of the new challenges that the Postal Service now faces and the additional financial burdens that these challenges bring.